Third year of high growth, with slow cooling-off
Growing by 7.5% in 2023, Georgia experienced the third consecutive year of very high growth. Key drivers were public investments and strong domestic consumption. The services sector, particularly tourism, transport and IT, played a significant role for growth. For 2024, a growth rate of 5.7% is expected. While the appreciation of the lari has slowed down, it has been contributing to reduced inflation pressures and allowing the NBG to lower the policy rate.
Trade dynamics slowed down as well, but there were significant increases in car imports and re-exports. Amid a high growth environment, the budget deficit and public debt fell to 2.8% and 38.2% of GDP, respectively. Looking ahead, the upcoming parliamentary election is an important factor for the direction of economic policy.
Public investment and consumption as key drivers
In 2023, Georgia’s economy grew very strongly for the third year in a row, with a growth rate of 7.5%. The primary drivers were investments (22.6% yoy), mainly from the public sector, and the continuation of strong domestic consumption, which is traditionally a main determinant of growth. Investments played an important role in boosting the construction sector (17.2% yoy).
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The services sector (9.8% yoy) continued to dominate Georgia’s economy, with significant contributions from tourism, transport, and IT services. The effects of external factors, such as the relocation of people from Russia and Belarus, began to normalise: according to border statistics, there was a net emigration of approx. 40,000 people from Russia between Q1-2023 and Q1-2024. The initial influx of relocated people had provided a short-term boost to consumption and economic activity in 2022 and also affected external inflows such as money transfers. Looking ahead to 2024, the growth forecast is set at around 5.7%. This projection indicates a return to more typical trend growth rates as the temporary effects of external inflows and trade adjustments normalise. The forecasted growth for 2024 is supported by continued public investment and sustained consumer spending. With its growth profile, Georgia is also one of the frontrunners in the region.
Lari remains appreciated in real terms
The lari has experienced relatively low volatility in the last months: between mid-2023 and Apr-24, it stayed in a narrow band of around 2.60‑2.70 GEL/USD for most of the time, following a period of strong appreciation in 2022 and early 2023.
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The appreciation reflects several factors. One of the primary drivers of this appreciation had been the in-flow of people from Russia and Belarus since the start of the war in Ukraine. This influx brought substantial foreign currency into Georgia, supporting the lari. The recovery of the tourism sector also played a significant role in supporting the currency. Although many Rus-sians have since left, this has not caused a significant outflow of foreign currency. Money transfers, while also trending towards normalisation, remain elevated relative to the pre-war period.
Although the trend towards real appreciation slowed down in 2023, the lari has appreciated by around 40% in real terms overall since 2021. This makes it easier to import investment goods and has a dampening effect on inflation (as many goods are imported) but is also a drag on competitiveness.
At USD 4.8 bn, international reserves are somewhat higher than in previous years. However, they have been declining since the second half of 2023. In Mar-24, the NBG bought gold for the first time in its history (7t for USD 500 m) which now accounts for approx. 11% of reserves.
Inflation remains low, monetary policy easing
The appreciation of the lari has helped mitigate imported inflation by making imports cheaper. Inflation fell sharply to close to zero in the course of 2023 and has only risen slightly since then (Apr-24: 1.5% yoy). In response to reduced inflationary pressures, the National Bank (NBG) has adopted a cautious approach to monetary policy easing. It gradually reduced the policy rate from 11% to 8% in seven steps during 2023 and 2024.
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Normalisation of trade, cars as the main driver
Trade dynamics has normalised after three exceptional years. Exports and imports of goods rose by 9.1% and 15.1% yoy, respectively. The changes are largely attributable to the development of re-exports, with mo-tor vehicles (re-exports: +135%, imports: +95%) contributing the most to this increase. The general trends are forecast to continue in 2024, with an increase in goods exports and imports of 7.9% and 7.2% yoy, respectively.
Exports of services rose by 23.6% in 2023, a moderate increase compared to the last three years, which were characterised by special factors. Revenues in the important tourism sector rose to USD 4.1 billion (17% yoy). The transport (23% yoy) and IT (53% yoy) sectors also showed positive momentum, starting from a lower base, and are becoming increasingly important for service exports as a whole. In 2024, these are expected to increase by 7.9% compared to the previous year.
Budget deficit and public debt ratio reduced
The budget deficit in 2023 reduced slightly to 2.8% of GDP. At first glance, this may seem high in view of the strong growth environment, but many expenditures can be attributed to investment costs. Importantly, forecasts suggest a continuation of adhering to the fiscal rule limit (3% of GDP) in the medium term.
High growth and appreciation in the last years contributed to a strong decrease in the public debt ratio. Standing at around 50% of GDP in 2021, the ratio now stands at 38.2% of GDP. As with the budget deficit, the debt ratio is also expected to stabilise around the current level in the medium term.
Outlook
The Georgian economy has recorded strong growth in recent years and is expected to continue to develop well. A significant factor to look out for are political developments. In May, the “Law on Transparency of Foreign Influence” was passed, according to which non-governmental organisations and media that receive more than 20% of their funding from abroad must register. Politically, the law has led to widespread protests and worsened the relations with the EU. On 27 June, the European Council said that the law is “de facto leading to a halt of the accession process”. On the economic side, the German Business Association, AmCham and others have spoken out against the law, fearing an adverse impact on the business climate. While it is too early for a comprehensive assessment, immediate economic effects are already visible: the lari has depreciated, with the NBG supporting the currency with FX sales of USD 168.7 m. The risk premium of the Georgian Eurobond compared to US Treasury Notes has increased. It remains to be seen whether these trends are temporary. Observers are focusing their attention on the upcoming parliamentary election in October, which will also be a key factor for the direction of economic policy.
This newsletter is based on the 19th edition of our Eco-nomic Monitor Georgia (forthcoming).
